The Pound-to-New Zealand Dollar Rate's Week Ahead Forecast

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GBP/NZD charts point to more downside but dairy price data out of New Zealand and inflation data out of the UK could shake the trend this week.

The Pound-to-New Zealand Dollar exchange rate is in a short-term downtrend which is expected to extend at least a little further lower.

If it succeeds in breaking below the 1.8619 lows it will probably continue down to a target at 1.8425, just above the 200-day moving average (MA).

At the 200-day MA, the exchange rate will probably encounter extra demand as short-term technical traders try to push the market higher on the expectation that it will rise.

Large moving averages often act as obstacles to downtrends and can be the locations for reversals, as we think this 200 may.

Overall the pair is in a medium-term ascending channel which suggests it will probably eventually reverse and move higher, falling in line with the overall uptrend, as can be clearly seen on the weekly time frame chart below.

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Data and Events for the New Zealand Dollar

Data out of New Zealand this week is rather low-key with business confidence numbers out on Monday (21.00) being of interest.

Markets will be looking for positive developments in the latest set of findings as confirmation that the plummet in confidence during and after last year's election continues to be reversed.

If so, we would expect the New Zealand Dollar's strong start to 2018 to extend.

Monday also sees the release of Capacity Utilization data, which measures how much spare capacity or slack there is in the economy, or how much under-utilized desk space or sleeping machinery there is - the more slack there is the less likely the Reserve Bank of New Zealand (RBNZ) is to tighten monetary conditions and the more negative that is for the Kiwi.

On Tuesday, the price of dairy products which are New Zealand's largest single export is fixed at the Global Dairy Trade Auction (GDT).

After a string of falling prices, the last GDT showed a small recovery of 2.2% but analysts will want to see another strong rise to be convinced prices are turning the corner.

Higher prices mean a stronger Kiwi as it increases aggregate demand for the currency from buyers of dairy products.

Finally, Thursday, January 18, sees the release of a general Business purchasing manager survey for New Zealand, which came out at 57.7 previously.

Data and Events for the Pound

The key data release for the Pound is inflation data out at 09.30 on Tuesday, January 16, which is forecast to ease to 3.0% compared to the same time in the previous year, from 3.1% in November.

Core inflation is likewise forecast to ease to 2.6% from 2.7% previously.

A higher-than-forecast print will probably strengthen the Pound as it will increase pressure on the MPC to increase interest rates in order to try and limit future inflation levels.

Higher interest rates are positive for currencies because they draw greater inflows of foreign capital with the promise of higher returns.

Analysts at TD Securities are marginally more hawkish, expecting inflation to remain at 3.1% and not fall back in December.

"Our 3.1% forecast for headline CPI is just above the top of the BoE's target range and well above the BoE's forecast of 2.7% from the Nov Inflation Report. Core CPI should soften by a tenth, but the big jump in energy prices into the end of the year will keep the headline well-supported," says TD Securities in a note to clients ahead of the new week.

Friday sees the release of retail sales data which often moves Sterling as it gives an insight into the health of the UK consumer.

The UK economy is heavily reliant on the retail sector and should data beat expectations we would expect some positive response in Sterling.

The bar is actually set quite low for a positive surprise as monthly retail sales for December is forecast to show a decline of 0.6%, a slowing from the previous month's growth rate of 1.1%.

Monday sees the Bank of England in focus with a speech from Silvana Tenreyo (above), the new member of the Bank's Monetary Policy Committee (MPC), at 18.15 GMT on Monday, January 15.

Not long after she first joined the BOE back in October 2017 Tenreyro said she would want to see UK employment improve and wages rise further before advocating raising interest rates - a move which would be bullish for the Pound.

"Silvana Tenreyro, an external MPC member, said she would need to see more evidence of the elimination of slack in the labour market before voting for a rate rise," says Chris Giles, Economics Editor at the Financial Times.

Yet the unemployment rate has not fallen since she said those comments and instead has stayed the same at 4.3% since September 2017, so assuming this is still her view, we do not expect her to talk up interest rates on Monday, which is on margin negative for Sterling.

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Inflation expectations are important for currency markets because the RBNZ can only be expected to raise interest rates after inflation has made a sustainable return into the higher end of the 1% to 3% target band.

“We don’t foresee an OCR hike until late-2019. If anything, we would put the odds of an OCR reduction this year as slightly higher than the odds of a hike, although a large shock would be required to generate either,” - Westpac.

Fourth-quarter unemployment data comes ahead of the latest interest rate statement from the Reserve Bank of New Zealand, which could yield a hawkish change in the central bank's language, according to one strategist.